A guide to taking a payment holiday on your mortgage
A mortgage payment holiday can help you cope in times of financial trouble, but it's not always your best option.
A mortgage payment holiday can be a life-saver for homeowners who fall into financial trouble, but it’s not always the best option in this scenario.
Below, you’ll discover how a mortgage payment holiday works, when you’ll be eligible for one and the pros and cons of taking one.
What is a mortgage repayment holiday?
During a mortgage repayment holiday, you won’t need to pay anything to your mortgage lender.
Interest will still accrue on your loan, making it more expensive to pay off in the long run, but it can nevertheless be a useful option to those unable to meet their mortgage repayments in the short term.
A mortgage holiday isn’t a feature that is included in all mortgages. So it’s worth investigating whether you’ll be able to take one while researching your mortgage options.
Taking a mortgage holiday due to COVID-19
Making monthly mortgage repayments is unsurprisingly a top concern for many UK homeowners right now, given the widespread disruption and infection risk resulting from the current coronavirus (COVID-19) outbreak.
Naturally, initial worries centred on how repayments could be met if mortgage holders were either in isolation or in quarantine, or taken ill with the disease and unable to work for long periods of time.
However, with the latest government guidance now advising against commuting, international travel and social interactions at restaurants, pubs and theatres, workers across many different parts of the economy will now also be seriously concerned about their sources of income.
Which lenders are offering a COVID-19 mortgage holiday?
Originally, as the COVID-19 crisis began to escalate at the beginning of March, major mortgage lenders such as RBS, NatWest, Lloyds and TSB confirmed that they would be offering mortgage holidays to affected customers.
However, on the evening of 17 March 2020, Chancellor of the Exchequer Rishi Sunak announced that all UK mortgage lenders would be offering three-month mortgage holidays to those in financial difficulty because of the coronavirus pandemic. He added that taking a mortgage holiday under these circumstances would not affect people’s credit scores, as is normally the case.
The Treasury then confirmed on 22 May that an additional three-month mortgage holiday would be made available to homeowners still unable to meet monthly repayments due to the impact of coronavirus. However, this is not an automatic extension – mortgage holders must contact their lenders at the end of their initial three-month period to discuss their circumstances and whether a mortgage holiday is still the right solution for them.
How do I get a COVID-19 mortgage holiday?
The key thing to remember here is that only customers who are experiencing financial difficulties as a direct result of coronavirus will qualify for a mortgage holiday under the Chancellor’s latest announcement.
Mortgage holders could be facing financial difficulties for a number of reasons, such as:
- A consequence of catching the illness itself and being off sick.
- Being in self-isolation or in quarantine and not being able to work.
- Not being paid because their employer is in financial trouble as a result of the economic turmoil, and is cutting workers’ hours or laying off staff.
- Being a business owner who is losing income as a result of closure or lack of custom because of the government’s advice to the public to stay at home.
Is it possible to take a COVID-19 mortgage holiday with a buy-to-let mortgage?
On 19 March 2020, the government made a further announcement that the three-month mortgage holiday for those affected by coronavirus will now also apply to people with a buy-to-let mortgage.
This is so that if tenants are having difficulty paying their rents because of the pandemic (they are ill or their source of income has been reduced by the economic disruption), landlords won’t face the knock-on effect of struggling to make their mortgage repayments.
People with a buy-to-let mortgage who think they won’t be able to meet their monthly mortgage payments as a result of the coronavirus outbreak should therefore contact their lender as soon as possible.
It is also worth noting that to protect tenants, the government has announced that landlords will not be able to start proceedings to evict them for at least a three-month period, should they fall behind with their rent.
Any buy-to-let landlords who successfully apply for a COVID-19 mortgage holiday because of their tenants’ financial difficulties are expected to reduce their tenants’ rent appropriately.
Can I be eligible for a mortgage repayment holiday in normal circumstances?
Away from COVID-19, in normal circumstances mortgage holders can also apply for a mortgage holiday.
Individual lenders have their own rules about how long mortgage repayment holidays can last (usually a maximum of six to 12 months) and who can be eligible for them. These conditions will be made clear within the terms of the mortgage.
Nevertheless, here are some expectations you’ll usually have to meet to be granted a mortgage holiday:
- You’ve built significant equity in your property. Don’t expect a repayment holiday at the very start of your mortgage term. You’ll usually have to have been paying your mortgage for a specific amount of time before you’re eligible for one. Some lenders will only grant you a repayment if you’ve reached a certain level of equity in your property.
- You’re up-to-date with your payments. If you’re already in arrears, the lender will be more concerned about retrieving what they’re owed, rather than letting you build up more debt. Some lenders will only approve a repayment holiday if you’ve previously made overpayments.
- You can afford your larger repayments. After your repayment holiday, the interest accrued will be added to the overall mortgage balance. You’ll pay compound interest on this for the entirety of your mortgage term. If the lender suspects you might not be able to afford this, it won’t grant you the holiday.
- You haven’t asked for one before. Some lenders will place limits on the amount of months worth of repayment holiday you’re allowed.
- You have a serious reason for wanting a repayment holiday. FCA-regulated mortgage lenders are bound to consider any reasonable solutions for people struggling to repay their debts. Those in a short-term financial problem – perhaps because they lost their job or suffered changes to their personal circumstances – are more likely to be approved than someone who wants to swan off on a six-month holiday.
Alternatives to a mortgage repayment holiday
Mortgage repayment holidays can prove to be expensive due to compound interest. They’ll also negatively affect your credit score. What’s more, their short-term nature means they won’t be suitable for everyone. Here are some alternatives that may work better in your situation:
- Extending your mortgage term. This will reduce the size of your monthly repayments, but it’ll be longer until you’re mortgage-free and you’ll pay a lot more interest over the length of the term.
- Switch to an interest-only mortgage. This will lower your mortgage repayments, as you’ll only be paying interest. However, you’ll have to pay off the capital at the end of the term. In order to be approved for an interest-only mortgage, you’ll have to show a solid strategy for raising the money to make this final payment.
- Get debt advice. If you’re facing long-term money problems, you’ll need a long-term solution. Our guide on mortgage arrears has some ideas, but it may prove useful to get in touch with a debt adviser.
What are the pros and cons of a mortgage repayment holiday?
- You can pause your mortgage repayments without paying a huge penalty.
- Lenders have to consider reasonable applications for payment holiday.
- There are usually several conditions to meet to be approved.
- It could prove expensive due to compound interest and there are usually fees involved.
- Mortgage payment holidays are listed on your credit report and will harm your credit score.
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